MIL-OSI Security: Security News: Idaho I.T. Professional Charged With Misappropriating Pre-Publication Investment Recommendations For Insider Trading Scheme

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Source: United States Department of Justice News

David Stone Electronically Accessed an Investment Advice Service’s Unannounced Stock Picks and Used That Information to Generate Millions in Trading Profits and to Provide Inside Tips to Another

Damian Williams, the United States Attorney for the Southern District of New York, and Michael J. Driscoll, Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of a complaint charging DAVID STONE with securities fraud in connection with an insider trading scheme. STONE was arrested yesterday and will be presented today in the United States District Court for the District of Oregon.

U.S. Attorney Damian Williams said:  “As alleged, David Stone used his computer skills to extract pre-publication stock picks from an investment advice service so he could beat the markets and generate millions in trading profits. Though Stone may have thought that he could hide his scheme behind IP addresses, other losing trades, and donations to his church, he was wrong. This prosecution reflects my office’s commitment to market integrity and a fair playing field for investors.”

FBI Assistant Director Michael J. Driscoll said:  “As we allege here today, Mr. Stone exploited his unauthorized access to market-moving stock recommendations to make trades in advance of their release.  In relaying tips to another individual, he acknowledged his actions might be illegal and even provided advice to the individual on avoiding detection.  As today’s action demonstrates, the FBI and our partners remain committed to protecting the integrity of our financial markets from the unscrupulous actions of those who seek to reap illegal gains from them.”

According to the allegations in the complaint unsealed today in Manhattan federal court:[1]

From 2020 up to his arrest in 2022, DAVID STONE exploited market-moving stock recommendations made by an investment recommendation service (“Advisor-1”) before those recommendations were released to paying subscribers. STONE, an information technology (“I.T.”) professional, accessed Advisor-1’s computing system without authorization and viewed information relating to Advisor-1’s recommendations before they were announced to Advisor-1’s paying subscribers.

Advisor-1’s stock recommendations typically, but not always, lead to higher closing prices for the recommended stock as compared to the prior day’s closing price. By trading on those recommendations before they were announced, STONE was able to obtain significant profits unavailable to other market participants. In fact, since in or about November 2020, brokerage accounts associated with STONE traded ahead of Advisor-1 recommendations on more than a dozen occasions for approximately $3 million in gross gains.

In addition to his own trading, STONE supplied trading tips to at least one other person (“Tipee-1”). Between on or about January 20, 2021 up to and including on or about March 17, 2022, on approximately 45 different days, STONE sent emails to Tipee-1 providing stock names and/or ticker symbols ahead of Advisor-1 announcements of stock recommendations to its paying subscribers. Since in or about January 2021, a brokerage account associated with Tipee-1 traded ahead of Advisor-1 recommendations on more than a dozen occasions. As a result of that trading, Tipee-1 profited more than approximately $2.7 million.

Before providing tips to Tipee-1, STONE provided Tipee-1 with “guidelines” for avoiding detection and for donating some of the trading profits to a church. Specifically, on or about January 16, 2021, STONE sent an email to Tipee-1 that included the following:

I’m ok with sharing the weekly trades with you. I have used it so far to generate a significant amount of money and I’m sure you will be able to as well. There is a small possibility that what we are doing could be considered insider trading. [Advisor-1] uses only public information about to make its recommendations and even the recommendations are behind a paywall so it is a stretch to call it insider trading but it certainly behaves like it because it almost guarantees favorable price moves at a certain time.

So with that in mind these are the guidelines I am following:

. . . .

* Purchase a [Service-1] subscription from [Advisor-1] . . . and open some long term position of some of the recommendation that appeal to you

* Do other trades besides just what I tell you. If all your trades are up 5x and you never make a loosing trade it may call attention of regulators. . . .

* Pay your taxes. These trades are short term capital gains and are taxed at your regular income tax rate. You may get a significant tax bill come April 15 2022.

* Pay your tithe. This extra income has been a subject of regular prayer for me. I anticipate I will not need to keep my regular job for long when we are on the mission field. I have opened a donor advised fund which make it easy to contribute large sums of money or stocks directly and then schedule donations to be made to my church and any other charity I choose. It makes it easier to make anonymous donations as well which I feel is important.

. . . .

With these guidelines in place I can email the recommendations as soon as I know. I feel [a particular email provider] will be a more secure form of communication if it works for you.

*                *                *

STONE, 36, of Nampa, Idaho is charged with one count of securities fraud, which carries a maximum sentence of 25 years in prison.

The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Mr. Williams praised the outstanding work of the FBI.  Mr. Williams also thanked the U.S. Securities and Exchange Commission, which today filed a parallel civil action. 

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant United States Attorneys Samuel P. Rothschild and Andrew Thomas are in charge of the prosecution.

The charges contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

 


[1] As the introductory phrase signifies, the entirety of the text of the Complaint and the description of the Complaint set forth in this release constitute only allegations, and every fact described should be treated as an allegation.

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